CAS
CASHHFLOW FLOW SSTATTATEEMENMENTTSS
A cash flow statement may easily be understood as a summary of the cashbook – set out using standard formats. The standard formats require the cash movements as per cashbook to be summarised in the cash flow statement in 3 categories:
1) Operating activities 2) Investing activities 3) Financing activities
Suppose a cashbook was provided as follows
Cashbook (Cash and Bank
Sh Sh
Sh Sh
Balance b/d a
Receipts from debtors b Receipts from cash sales c Proceeds on disposal of fixed assets f
Loans obtained h
Payments to suppliers d Payment for expenses e Purchase of fixed assets g
Loans repaid I
Balance c/d j
XX XX
The cash flow statement would be drawn up as follows: Cash flow statement for the year ended (date) Opera
Operating ting ActivitiActivitie e Sh Sh SShh Receipts from debtors
Receipts from cash sales Payments to suppliers Payments for expenses
Net cash in flow from operating activities
b c (d) (e)
XX IInvnvesesting Actting Actiivitievitie
Proceeds on disposal of fixed asset Purchase of fixed assets
Net cash flow from investing activities
f (g)
XX Fi
Finanancing ncing ActivitiActivitiee Loans obtained Loans repaid
Net cash flow from financing activities Net cash flow
A Addddcash b/d h (i) XX XX a _ Cash c/f _
It can be seen from the above illustration that the cash flow statement is just a rearrangement of cashbook entries. However, the classifications are rigid; each item can only belong in one category. This classification must be fully understood. The items falling into each category are governed by paragraphs 10 – 17 of IAS7. These are listed below:
An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities. A single transaction may include cash flows that are classified differently. For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.
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1)) OOpeperatratiing ng activiactivitiesties
The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability of the enterprise, pay dividends and make new investments without recourse to external sources of financing. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.
Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are:
(a) Cash receipts from the sale of goods and the rendering of services; (b) Cash receipts from royalties, fees, commissions and other revenue; (c) Cash payments to suppliers for goods and services;
(d) Cash payments to and on behalf of employees;
(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
(g) Cash receipts and payments from contracts held for dealing or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.
An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that enterprise.
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2)) IInvnvesesting Activiting Activitiesties
The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are:
(a) Cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed
property, plant and equipment;
(b) Cash receipts from sales of property, plant and equipment, tangibles and other long-term assets; (c) Cash payments to acquire equity or debt instruments of other enterprises and interests in joint
ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(d) Cash receipts from sales of equity or debt instruments of other enterprises and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
(e) Cash advances and loans made to other parties (other than advance and loans made by a financial institution);
(g) Cash payments for future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) Cash receipts from future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable position , the cash flows of the contracts are classified in the same manner as the cash flows of the position being hedged.
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3)) FiFinanancing ncing ActiviActivitiesties
The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the enterprise. Examples of cash flows arising from financing activities are;
(a) Cash proceeds from issuing shares or other equity instruments; (b) Cash payments to owners to acquire or redeem the enterprise’s shares
(c) Cash proceeds from issuing debentures, loans, notes, bonds mortgages and other short or long-term borrowings;
(d) Cash repayments of amounts borrowed; and
(e) Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease. The first category (operating activity) cash flows may be arrived at by two methods;
(a) The direct method – whereby major classes of gross cash receipts and gross cash payments are disclosed; or
(b) The indirect method – whereby the net profit or loss is adjusted for the effects of transactions of a non-cash nature and accruals/prepayments
[[TThe ehe examixaminer prefers the ner prefers the iindindirect method as rect method as lless ess raw draw data neata needs to be eds to be supplisupplied to the ed to the candicandidate adate and and a more rigoro
more rigorous understaus understandinding of cash flng of cash flow sow statetatements ments iis exps expected from the candidate]ected from the candidate] E
Even though both meven though both methods lthods lead to the ead to the same same end results, the diend results, the direct method irect method is more recomms more recommended aended ass iit provit provides des more information more information to the usto the user of the fier of the financinancial al stastatemtementsents..
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Format for cash flow staormat for cash flow statemtement (usient (using ding direct cash flrect cash flow ow memethodthod O
Opeperatratiing ng activitiactivitieses Sh Sh ShSh Cash receipts from customers X
Cash paid to suppliers and employees (X) Cash generated from operations X Interest paid/received (X)
Income taxes paid (X)
N
Net et cash cash flflow ow from from operaoperatiting ng actiactivitivities es XX IInvnvesesting ting activiactivitiesties
Purchase of property plant and equipment (X) Proceeds on disposal of equipment X_ N
Net et cash cash flflow ow from from iinvenvesting sting activiactivitities es XX
F
Fiinanancing actncing actiivitiesvities
Proceeds from issuance of share capital X Redemption and purchase of share capital (X) Proceeds from long- term borrowings X Repayments on long-term borrowings (X) Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_ Net change in cash and cash equivalents X Cash and cash equivalents b/f X_ Cash and cash equivalents c/f XX F
Formaormat for t for cash flcash flow sow stattatements (using ements (using iindirndirect cash flect cash flow mow methoethod)d)
Sh Sh
Sh Sh
Net profit before tax X Adjustment for items not involving movement of cash
Depreciation X
Profit and losses on fixed asset disposals X_ X Adj
Adjustmustment ent for working capifor working capital ital itemtemss
(Increase)/Decrease in stocks X (Increase)/Decrease in debtors X (Decrease)/Increase in creditors X. Cash generated from operations X
Tax paid (X)
N
Net et cash cash iinflow nflow from from opeoperatratiing ng actactiivitivities es XX IInvnvesesting Activiting Activitiesties
Purchase of property plant and equipment (X) Proceeds on disposal of equipment X_
Net cash flow from investing activities X Fi
Finanancing ncing ActivitiActivitieses
Proceeds from issuance of share capital X Redemptions and purchase of share capital (X) Proceeds from long-term borrowings X Repayments on long-term borrowings (X) Payments on finance lease obligations (X)
Dividends paid (X)
Net cash flow from financing activities X_ Net change in cash and cash equivalents X Cash and cash equivalents b/f X_
Practise Practise EExexercircise se 11
The balance sheet of Bidhaa Ltd for the years ended 31 December, 2010 and 31 December 2011 were summarised and shown below:
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200111 1 22001100 Fixed assets (at written down values) shs shs shsshs
Premises 10,000 10,000 Fixtures 17,000 11,000 Vehicles 12,500 8,000 Current assets Stock 17,000 14,000 Debtors 8,000 6,000
Bank and cash 23,000 29,500
87,500 78,500 Ordinary shares of shs1 per share 60,000 50,000 Reserves
Profit and Loss 5,000 4,000
Creditors due in less than one year
Trade creditors 4,000 2,500
Taxation 1,500 1,000
Proposed dividends 2,000 1,000 Creditors due in more than one year
10% debentures 15,000 20,000 87,500 78,500 N
Notote:e: The 10% debentures were redeemed and cancelled on 31 December 2011 The profit and Loss account for the year ended 31 December 2011 was summarised thus:
shs shs
shs shs
Turnover 36,250
Cost of sales (21,750)
Gross profit 14,500
Profit on disposal of vehicles 700 15,200 L
Lesess:s:
Wages and salaries 1,600 Other (cash) expenses 3,600
Depreciation 3,500
Debenture interest 2,000
10,700
Profit before tax 4,500
Less: Tax 1,500
Profit after tax 3,000
Less: Proposed dividends (2,000) Retained profit: for year 1,000 : Brought forward 4,000
Separate bank and cash accounts for the year ended 31 December 2011 were summarised as shown below: Bank Bank s shhss Cash Cash s shhss Bank Bank s shhss Cash Cash s shhss Opening balance b/
Receipts from debtors Receipts from fixed asset disposals – vehicles Ordinary share issue Transfer from cash
25,30 30,500 1,200 10,000 4,650 _ 4,20 3,750 500 _
Payment to trade creditors Wages, salaries Other expenses Debenture interest Fixed assets fixtures vehicles Tax paid Dividends paid 10% debentures: redeemed Transfer to bank Closing balances c/d 23,25 700 2,400 2,000 7,000 8,000 1,000 1,000 5,000 21,300 -900 1,200 -4,650 1,700 71,65 8,45 71,65 8,45 Opening balances b/d 21,30 170 Sugg
Suggested ested SolutiSolutionon(refer only to cash book for 1stsolution)
Bi
Bidhdhaa aa LLtdtd
Cash flow statement for the eyar ended 31 December 2011 (Direct Method) O
Operaperatiting ng actiactivitivities es shs shs shsshs Cash receipts from customers (30500 + 3750) 34,250
Cash paid to suppliers and employees (23250 + 700 + 900) (24,850)
Other cash payments (2400 + 1200) (3,600) Cash generated from operations 5,800
Tax paid (1,000)
Debenture interest paid (2,000)
Net cash inflow from operating activities 2,800 IInvnvesesting ting activiactivitiesties
Payments to acquire fixtures (7,000) Payments to acquire vehicles (8,000) Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300) Fi
Finanancing ncing ActivitiActivitieses
Ordinary share issue 10,000 Redemption of debentures (5,000)
Dividends paid (1,000)
4,000 Net change in cash and cash equivalents (6,500) Cash and cash equivalents b/f (25,300 + 4,200) 29,500_ Cash and cash equivalents c/f (21,300 + 1,700) 23,000 N
Notote:e:
1) When all cash movements have been brought in, the opening cash is added thereon to generate the closing cash
Cash in hand Cash at bank Short-term investments
For the solution using the indirect method, no reference to the cash book is made. Information provided to enable preparation of the cash flow statement under this method consists:
1) Beginning of the year balance sheet 2) End of year balance sheet
3) A profit and loss account for the year 4) Additional information
Thus accounts need reconstruction to obtain required values for the cash flow statement to be drawn up. Bi
Bidhdhaa aa LLtdtd
Cash flow statement for the year ended 31 December 2011 (Indirect method) O
Operaperatiting ng actiactivitivities es shs shs shsshs Net profit before tax 4,500
Adjustment for items not involving movement of funds
Depreciation 3,500
Profit on disposal of vehicles (700) 7,300 Adjustment for working capital items
Increase in stock (3,000) Increase in debtors (2,000) Increase in creditors (trade) 1,500 Cash generated from operations 3,800
Taxation paid (1,000)
Net cash inflow from operating activities 2,800 IInvnvesesting ting activiactivitiesties
Payments to acquire fixtures (7,000) Payments to acquire vehicles (8,000) Proceeds on disposal of vehicles 1,700
Net cash outflow from investing activities (13,300) Fi
Finanancing ancing activitictivitieses
Ordinary share issue 10,000 Redemption of debentures (5,000)
Dividends paid (1,000)
4,000 Net change in cash and cash equivalents (6,500) Cash and cash equivalents b/f (25,300 + 4,200) 29,500 _ Cash and cash equivalents c/f (21,300 + 1,700) 23,000 _
